The objective of financial statements is to enable users make economic decisions based on the information contained in the income statement, balance sheet and cash flow statement. One of the most important principles that underpin financial statements is the matching principle. This principle states that revenues should be matched with expenses that were incurred to generate it. In the balance sheet, assets should be matched with liabilities and equity while in the cash flow statement the sources and uses of cash are matched. Accrual accounting is used to implement the matching principle in the income statement and balance sheet. REQUIRED If any of the users below were to make decisions on how financial statements should be prepared, what do you think would be their focus, and what principle/s do you think would underpin the financial statements. i) Short term lenders such as banks ii) Long-term equity investors iii) Tax authorities Marks 2 2 2 b) Lunga (Pty) Ltd, a retailer has the following working capital accounts. Year 2020 2019 2018 Current Assets Cash 2000 1500 1000 Accounts receivables 6000 4000 2000 Inventory 8000 4500 2000 Total current assets 16000 10000 5000 Current Liabilities Accounts payables 4500 3500 2000 Short-term liabilities 3500 1500 500 Total current liabilities 8000 5000 2500 REQUIRED (1) For years 2018 2020, calculate and comment on Lungas liquidity position based on: i) Current ratio ii) Quick ratio iii) Cash ratio Marks 7 4 QUESTION 2 25 MARKS After long negotiations, Marks & Spencer (M&S) merger with David Jones occurred in 2020.The combination of these two companies provides significant advantages that will benefit them and their customers. The group will have increased scale that will drive significant efficiencies and economies through enhanced global sourcing and the ability to leverage shared seasonality and trends, improving value for the customer and overall pr ofitability. Each business will be well equipped to compete with global retailers in their respective markets. To finance this deal, M&S issued a 7%, 10-year bond with a face value of R50 000 000 on the 1 January 2019. The market interest rate at the time of issuance was 9%. The coupon payment would be made twice a year which will be on the 31st July and 31 January. This is the only long-term liability that M&S has in the balance sheet. Below is the extract of M&S group balance sheet for 2020 and 2021. REQUIRED (a) At what price was this bond issued? Marks 5 (b) Amortize this bond and show the outstanding liability at the end of the first five years (round up to the nearest million) 5 (c) Clearly indicate by use of figures (where possible) the effect of issuing this bond on the following in 2019 and 2020: i) Interest recorded in the income statement ii) CFO iii) CFF iv) Outstanding liabilities in the balance sheet 2 2 2 2 (d) What is the impact of issuing this bond on the trend of net income of M&S 2 (e) Calculate leverage ratios of M&S and comment on its solvency status in 2020 and 2021 5 TOTAL 25 (2) Describe and calculate other useful indicators of firms liquidity that can be calculated from Lungas Balance sheet information provided/.. 5 (3) Using the results of parts (1) and (2), discuss the limitations of the current ratio as a measure of liquidity for Lunga. 4 (4) List other ratios that would be useful to confirm your analysis. State what you would expect these ratios to show. 3